How do I figure out if a biotech company will succeed? In short – you probably can’t. As any teenager knows, human bodies are complicated, and even the brightest biologists can’t say for sure which drugs will and won’t work. The only way to find out is to try.

The further along a drug is in the development process, the more likely it is to end up being successfully approved and marketed. There’s a trade-off, however. The later you invest, the lower the risk – but with other investors cottoning on and pushing up demand for the developer’s shares, and therefore their price, the potential gains are smaller too.

Investing in a biotech company before it’s begun clinical trials is extremely risky. Even in the clinical stage, you’re still gambling on everything staying peachy. Still, there are ways of mitigating the risks. You can visit the ClinicalTrials(.)gov website to see details of ongoing trials worldwide and browse test results. If you’re comfortable with statistics, you can even try to analyze the data yourself and work out if a drug’s effects are statistically significant. Otherwise, sift through the biotech press to see what people are saying – but treat company-issued press releases with an appropriately scientific skepticism…

One positive sign is a firm voluntarily including a control group in the first and second phases of drug trials. Testing for the “placebo effect” isn’t a legal requirement until phase three, so a company deciding to do it earlier may be a sign of confidence in its product.

Some biotech firms will already have working treatments on the market, but even these are risky investments. Most plow all of their profit back into the company, and if sales don’t keep growing at the forecast rate (due to unexpected competition, for example), the stock price could tumble.

What else should I look for?

It’s smart to scan for companies with more than one product in development. That way if one fails, there’s a backup that could still offer some chance of success – so you’re less likely to lose everything. Take note of the diseases they’re targeting, too: some, like Alzheimer’s, are notoriously hard to cure.

You should also see if any big players have taken a shine to the company. Drug development is much easier when you’re sharing facilities and expertise with larger partners who can also help with marketing and distributing a product if it ever does get approved. Once again though, this is a trade-off: a company that partners with a big pharma firm will likely have to split any eventual profit, meaning less lolly for its shareholders.

Finally, it’s worth looking at the people behind the company – particularly the senior management. It’s always important for those in charge to understand how a business actually works, and that’s especially true in the fiddly field of biotech. Some investors choose to focus on firms run by scientists: you don’t want someone who doesn’t know how to drive behind the wheel, after all…

All this can you give an idea of if a drug might end up working – but that’s not much use if the company can never make money from it.

Your biotech stock checklist:

• Drug development process: The further along a drug is in its research and development, the less risky the company is likely to be.

• Products already on the market: A company with drugs already out there might be generating cash it can reinvest in developing new medicines, reducing the risk to investors.

• Multiple drugs in development: More drugs in development means less potential downside if one of them doesn't move forward.

• Target diseases: Some are notoriously difficult to treat, whereas historical progress against others suggest a greater likelihood of a company succeeding.

• Partnerships: Teaming up with big biotech or pharma players can give biotechs a leg-up when it comes to marketing and distributing a successful product.

• Management: A track record and experience of the industry could be a risk-reducing bonus.